Kicking the Tires on CSC: Could a Buyout Happen This Time?

Computer Sciences Corp., an IT services provider, has long been a rumored buyout target. Now that the company’s CEO is retiring amid shrinking revenue and a steep drop in its stock price, the time might finally be right.

A bunch of private-equity firms including Blackstone and TPG Capital have done work around CSC recently, studying the feasibility of a buyout and talking to banks about financing, according to people familiar with the matter. Another firm, KKR, had earlier looked at CSC but is currently not interested, one person said.

Much of this is preliminary, and to the extent that buyout firms run the numbers on potential acquisition targets all the time, their exploration of a CSC buyout doesn’t signal a deal is near. The people familiar with the matter also cautioned that these early-stage discussions are internal, and things may not progress from there. The weak financing environment doesn’t instill much confidence either.

A CSC spokesman declined to comment.

Buyout firms covet companies such as CSC, whose business model of contract-based services brings in steady cash flow. But why could a deal actually get done this time around?

For starters, the Falls Church, Va. -based tech company announced last month that CEO Michael Laphen plans to retire next year. Laphen told Bloomberg News last year he wanted to keep CSC independent, despite inquiries from potential buyers. His exit potentially paves the way for an ownership change.

Also, CSC is much smaller today than five years ago. Its market capitalization is around $4 billion, compared with the last time buyout firms had reportedly looked at it in 2006, when the market valued it at more than $10 billion.

CSC, which provides technology and IT-related services to governments and businesses, has been hurt by cuts in U.S. federal government spending. Last week, CSC shares fell 15% after the company reported a net second-quarter loss and lowered its forecast for the 2012 fiscal year. The shares were already down some 40% since the beginning of the year, a loss of market value that forced CSC to take a $2.7 billion goodwill impairment charge, contributing to the quarterly loss.

CSC’s woes don’t end there. The company, founded in 1959, has also been grappling with accounting errors in some parts of its business, which it and U.S. regulators are investigating. CSC said the SEC began its investigation on Jan 28, focusing on its Nordic-region business. The company says it is cooperating. Earlier this month, CSC said it has expanded its investigation to include its Australian business.